Judging by Nvidia’s (NASDAQ:NVDA) record revenue and margins last quarter, it looks like the company’s investment in new growth strategies is paying off well. Nvidia reported its Q3 2013 earnings on November 8 with $1.2 billion in revenues, marking a 15.3% q-o-q and 12.9% y-o-y growth. Additionally, at $209 million, net income marked a 75.6% q-o-q and 17.3% y-o-y increase on account of the transition to Kepler GPUs and a shift in mix toward high-end segments.

Driven by strong demand for Kepler desktop GPUs and record performance by notebooks and Tegra quad-core products, we think the company posted a solid third quarter. While Nvidia maintains a conservative estimate for its current quarter performance, we feel the same is more on account of macro factors and strong consumer business growth (ahead of the holiday season) in Q3, which might not sustain this quarter.

While the slowdown in the PC market has impacted many of its competitors such as Intel (NASDAQ:INTC) and AMD (NASDAQ:AMD), we think Nvidia’s growing focus and success in the mobile computing space has cushioned the negative impact of lower PC shipments on the company’s growth rate.

While non-PC revenue accounted for a mere 7% of Nvidia’s overall revenue three years ago, the percentage contribution has gone up significantly to 30%, as of Q3 2013. Primarily on account of robust growth in Tegra shipments, Nvidia’s consumer business marked 27.6% growth on a y-o-y basis. Tegra 3 quad-core processors powered many of the world’s popular devices this year – Google’s Nexus 7, Microsoft’s Windows RT Surface tablet, Lenovo’s IdeaPad Yoga 11, Fujitsu’s ARROWS X, World first RT device by Asus, etc.

According to Strategy Analytics data, Android’s tablet market share in Q3 increased to 41% compared to 29% in Q2 2013. Apart from Nexus 7, Tegra 3 powers a number of other Android tablets. Additionally, last month Nvidia scored another big win from HTC’s One X+ smartphone to be sold by AT&T, which makes AT&T the first US carrier to approve Nvidia’s Tegra 3 with 4G LTE for its network. (Read: Nvidia Takes On Qualcomm With Its 4G LTE Compatible Tegra Processors)

Over the last year, Nvidia’s tablet business has almost doubled and the Tegra business has increased 50% over last year. While the company remains more prominent in the tablet market, we believe that its investment to develop 4G LTE application processor will help it expand deeper into the smartphone market.

Apart from tablets and smartphones, Nvidia expects Tegra’s use in infotainment and navigation systems of cars will help drive revenue growth from the automotive business as well. While the company continues to face threats from Samsung and Qualcomm with its S4 line-up, we expect to see a significant increase in Tegra-related revenue in Q4 and subsequent quarters.

Strong Growth In Kepler Architecture

Nvidia launched its new Kepler GPU architecture, which is the first architecture to include virtualization technology built right into the GPU, in mid-March this year. The company claims that Kepler is its most efficient GPU architecture to date and expects the same to translate into more market share and higher margins. Owing to new Kepler desktop products and Ivy Bridge platform for notebooks, Nvidia’s GPU business posted a 10.7% sequential and 14.7% y-0-y increase.

Nvidia claims to have increased its market share in the premium segment with Kepler as part of the Ivy Bridge design cycle. Additionally, in Q3, it introduced the world’s first cloud-based GPU built on the Kepler architecture. Starting with desktops and notebooks, Nvidia intends to roll out Kepler into all of its businesses.

Last month Apple (NASDAQ:AAPL) refreshed its desktop offerings with Nvidia’s Kepler based discrete graphics solution. We believe that with its high-end graphic performance, Nvidia will be able to retain its foothold in its core business of GPUs for both desktop and notebook graphics.

Outlook for Q4 2013

– Revenue: $1.025 billion to $1.175 billion, a 2%-15% decline as the company is cautious about the PC end market demand.

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